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A company may, if its Articles provide, capitalize its profits by issuing fully- paid bonus shares. The issue of bonus shares by a company is a common feature. When a company is prosperous and accumulates large distributable profits, it converts these accumulated profits into capital and divides the capital among the existing members in proportion to their entitlements. Members do not have to pay any amount for such shares. They are given free. The vesting of the rights in the bonus shares takes place when the shares are actually allotted and not from any earlier date.

Advantages of Issuing Bonus Shares

  1. Fund Flow is not affected adversely.
  2. Market value of the Company’s share comes down to their nominal value by issue of bonus shares.
  • Market value of the members’ shareholdings increases with the increase in number of shares in the company.
  1. Bonus shares is not an income. Hence, it is not a taxable income.
  2. Paid- up share capital increases with the issue of bonus shares.

Conditions for Issue of Bonus Shares

  • In terms of Section 63(2) of the Companies Act, 2013, no company shall capitalise its profits or reserves for the purpose of issuing fully paid-up bonus shares, unless-it is authorised by its articles.
  • It has been authorized by the shareholders in a general meeting of the company, on the recommendation of the Board of Directors.
  • It has not defaulted in the payment of interest or principal in respect of fixed deposits or debt securities, if any issued by it.
  • It has not defaulted in respect of the payment of statutory dues of the employees, such as contribution to provident fund, gratuity and bonus.
  • The partly paid-up shares, if any outstanding on the date of allotment have been made fully paid up.

SEBI(ICDR) Regulations,2018

SEBI has issued regulations for Bonus Issue which are contained in Chapter XI of the SEBI (Issue of Capital and Disclosure Requirements) Regulations,2018 with regard to bonus issues by listed companies.

  1. Eligibility

Subject to the provisions of the Companies Act,2013 or any other  applicable law, a listed issuer shall be eligible to issue bonus shares to its members if:

It is authorised by its articles of association for issue of bonus shares, capitalisation of reserves, etc. However, if there is no such provision in the articles of association, the issuer shall pass a resolution at its general bosy meeting making provisions in the articles of associations for capitalisation of reserve.

It has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it.

It has not defaulted in respect of the payment of statutory dues of the employees such as contribution to provident fund, gratuity and bonus.

Any outstanding partly paid shares on the date of allotment of the bonus shares, are made fully paid-up. Any of its promoters or directors is not a fugitive economic offender.

  1. Rights of FCD/PCD holders

An issuer shall make a bonus issue of equity shares only if it has made reservation of equity shares of the same class in favour of the holders of outstanding compulsorily convertible debt instruments, if any, in proportion to the convertible part thereof.

  • Bonus out of Free Reserves

Bonus issue shall be made only out of free reserves, securities premium

account or capital redemption reserve account and built out of genuine profits or securities premium collected in cash and reserves created by revaluation of fixed assets shall not be capitalised for this purpose.

  1. Bonus Issue not to be in lieu of Dividend

The bonus share shall not be issued in lieu of dividend.

  1. Implementation of Proposal within fifteen days

An issuer, announcing a bonus issue after approval by its Board of Directors and not requiring shareholders’ approval for capitalisation of profits or reserves for making the bonus issue, shall implement the bonus issue within fifteen days from the date of approval of the issue by its Board of Directors.

Pre-requisites for Issue of Bonus Shares

  • Ensure that the Articles of Association authorizes it, if not then the Articles of Association needs to be altered in accordance with Section 14 of the Act.
  • Verify that the authorized capital is sufficient for the issue of Bonus shares. If it is not, then the Memorandum of Association has to be altered to increase the authorized capital.
  • The issue must be authorized at the General Meeting by shareholders.
  • Ensure there are no defaults in payment of interest or principal of the fixed deposit or debt security issued by the company.
  • The company must also ensure that there are no defaults in payment of statutory dues to the employees like gratuity, bonus, or contribution to the provident fund.
  • Ensure that all the shares are fully paid, if not then they must be fully paid.
  • The company must check the availability of all its resources.

Procedure for Issue of Bonus Shares

  1. Call for Board Meeting– Circulate a notice to inform about the scheduled board meeting of members in not less than 7 days. Below points should be considered in the board meeting:
    1. Section 174(1) mentions that 1/3rd of the total strength of the Board should be Quorum of the Board Meeting.
    2. Decide the ratio of issuing the Bonus Shares.
    3. The resolution of the board meeting should be conveyed.
    4. The Date with time and place for the EGM – Extraordinary General Meeting should be decided
    5. A notice for the EGM should be issued mentioning the entire details of the EGM along with authorized director for the right issue.
    6. As per the Section 101 of Companies Act, 2013, the notice of EGM should be issued at least 21 days before the scheduled date for EGM.

2.File Form MGT-14– e-form MGT-14 should be completely filled after the board resolution gets passed to issue the bonus shares. The days limit for the same is 30 days after the passed resolution. The passed resolution should be well attached along with the MGT -14 form.

3.Holding the EGM – Extraordinary General Meeting: These things must be considered during the EGM:

  1. The Quorum of the Meeting.
  2. Ensure if the Auditor is present. In case the auditor is absent then, check if the leave is approved or not as stated in Section 146 of Companies Act, 2013.
  3. If resolution is passed for Bonus Shares Issue.
  4. If resolution is passed for Allotment of Bonus Shares.

4.Filing e-Forms: File for PAS-3 once the EGM is done and the resolution is passed for bonus share issues. The form PAS-3 should be attached with the  below mentioned documents:

  1. The resolution for Allotment and issue of bonus shares.
  2. The entire list of all the allottees with all the details mentioned as Name, Address, Occupation and the allotted securities to each.

5.Issuing the Share Certificate– After allotting the shares, it is necessary for every company to issue bonus share certificate to its shareholders. The time frame for the same is 2 months.

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